Minimum Required Distribution Rules

As an incentive to help you save for retirement the government offers tax-deferred growth and deductible contributions through IRAs and work-sponsored plans. Although the government does forgive taxes on the front end of those perks it doesn’t totally forego them. By the age of 70 1/2 you are required to start taking withdrawals from most retirement accounts; otherwise you will face a stiff penalty. Those withdrawals are known as distributions or RMDs. They’re intended to prevent individuals from hoarding money so the IRA can eventually receive its cut of your savings.

These rules must be followed by all employer-sponsored retirement plans including 401k 403b 457b and profit-sharing plans. Individual plans such as the traditional IRA SEP-IRAs and SIMPLE IRAs are also subject to RMDs. The Roth IRA is an exception because it does not have any withdrawal requirements since tax was already paid on contributions up front. The Roth 401k does have withdrawal requirements but only after the original account holder has died.

Taking Distributions

Distributions must begin by April 1 of the year immediately following the year you turn 70 1/2. To make sure your distribution is adequate you will have to calculate the exact amount required by the IRS. Withdrawing anything above the minimum requirement is allowed. You can delay taking the RMD from your employer-sponsored retirement account plan until April 1 of the year after you retire if you are still working. So if you turn 70 1/2 and are still working you must start RMD from your IRA account event though you can delay taking them from your 401K. But if you wait until April 1 of the year immediately following your birthday you will need to take two RMDs that year which could impact your income tax bracket and liability.

Penalties

If you fail to take distributions the federal government will determine your RMD based on a report of your financial management firm accounts. A penalty will be assessed for 50% of the amount you were short. This is a steep tax assessment which is why it is important to remember to take RMDs and to withdraw an accurate amount. However if you don’t take out enough due to an error and you are in the process of trying to correct it you can file an appeal with the IRS to get the extra penalty waived.

How Much to Withdraw

The amount that you need to withdraw is based on your account balance your age and the age of your spouse if you are married. Life expectancy tables are produced by the IRS each year from that it determines your RMD so that ideally you draw down the majority of your account values within your lifetime. The withdrawal does not need to be made at any specific time or on any specific schedule. The only requirement is that your total withdrawals add up to at least your RMD amount by the end of the year.

If you have more than one retirement account of the same type (multiple IRAs) it doesn’t matter from which account or combination of accounts you withdraw as long as the total amount withdrawn adds up to your RMD. If you have more than one account type such as an IRA and a 401k you will need to make separate withdrawals and calculations from each account. That said if you are no longer working and have a 401k or other employer-sponsored retirement plan consider rolling it into an IRA.

Charitable Donations and RMDs

Under current law the last day for making a qualified charitable donation from an IRA was December 31 2013.

It is speculated that the Senate will decline to permanently extend the provision again opting for a two-year retroactive extension (to December 31 2015). During this period of uncertainty taxpayers must act carefully. For those who would otherwise utilize the IRA Charitable Rollover the best course of action is to wait as long as possible to take their 2014 IRA required minimum distribution to see Congress acts in 2014 as the IRA Charitable Rollover provision should it be enacted retroactively without changes will only apply to those distributions made directly from an IRA to a charity or charities.

Additional Considerations

RMD amounts don’t receive any special tax considerations. The distributions are taxed in the same way as any other withdrawal from the account would be taxed.

Unlike a SEPP or 72t plan you can take out more than the minimum and you can put money into the account. However you can’t roll the distribution from one account into another and thereby avoid paying taxes.

Your financial management firm is required to tell you whether you have an RMD due by January 31 of the following year. However it may not calculate it for you unless you ask.

Withdrawing money from your retirement account requires nearly as much planning as saving for retirement. Lindemeyer CPA can help you with the planning and prepare you for the tax consequences of required minimum distributions. Remember the taxes you will pay on the withdrawals are not nearly as stiff as the penalties you will face if you don’t withdraw enough. For more information on how to navigate your upcoming RMD or any other challenging financial issue click here and a member of our team will contact you to set up a time to discuss your issues.

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